Make super payments annual, not lump sum: CPA

Compulsory superannuation is failing to provide enough retirement income and appears to have reduced other forms of saving, a new study shows, prompting the nation’s biggest accounting body to call for consideration of mandatory annual payments instead of lump sums.

Retirees are using low-taxed super to extinguish increasing levels of debt, then double-dipping into government support by going on the pension, the study by CPA Australia says.

CPA says Australia is heading for a “retirement savings disaster", after examining compulsory superannuation system 20 years after its introduction. It has called on the federal government to consider an overhaul to target arrangements which are letting people take lump-sum payments, rather than pension streams, without significant penalty.

“The results could not be clearer. Australian taxpayers are facing a massive bill," CPA chief executive Alex Malley said.

“This study is a stark illustration that the superannuation system, as currently configured, has failed miserably in its aim of encouraging more Australians to save for retirement," Mr Malley said. “Many who have spent a large portion of their working lives under this system will still be relying on the pension,’’ he said.

“Given the compulsory nature of the system, it is perhaps worth considering the use of compulsory income streams in retirement and move away from the ‘lump sum as windfall’ mentality which could largely be blamed for the riskier investment and spending behaviour," he said.

CPA says increasing levels of household debt – and the absence of any severe penalty for taking super as a lump sum instead of a pension – have led to increasing numbers of retiring baby boomers resorting to the age pension, having largely spent their superannuation at, or shortly after, retirement to pay off debt.

The result is that the cost of retirement incomes to the federal budget is actually increasing because government provides tax breaks for super then has to pay the age pension.

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The argument for introducing compulsory super in the early 1990s was to reduce the cost of an ageing population on the budget by encouraging Australians to fund their retirement, rather than relying on the age pension.

But the study argues compulsory super has had a minimal impact on Australians’ capacity to save for a self-funded retirement. Further, compulsory superannuation appears to have had the effect of reducing other forms of household savings.

Non-retired households aged 50-54 years had a debt to superannuation ratio of 91 per cent in 2010, the study finds, and even those close to pension eligibility had a ratio of 42 per cent.

Average household superannuation grew 42 per cent between 2002 and 2010, non-superannuation financial assets grew 17 per cent, property by 60 per cent, property debt by 94 per cent and other debt 50 per cent.

For 50- to 64-year-olds, household superannuation grew 48 per cent, non-superannuation financial assets only 3 per cent, property 58 per cent, property debt 123 per cent and other debt 43 per cent.

The study finds that each dollar contributed as compulsory super is offset by a 30¢ reduction in other savings. It argues that knowledge that an amount of money will become available at retirement is making people more willing to take risk.